Equity Crowdfunding Is Changing The Landscape For Underrepresented Founders

The Republic hosted "Startup Fundraising — The Business of Diversity" in May 2018.

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The research findings are indisputable - diverse teams perform better. They create higher profitability, higher returns for investors, a faster pace to profitability and deliver overall better business performance. Despite the mounting evidence and calls for progress, particularly in Silicon Valley, the prospects remain dire for minority founders seeking traditional startup funding. In 2017, all-women founding teams received just 2% of the total pot of venture capital investments, while all-male teams received 79%. Average deal size for male and female founders also greatly differed, with woman-led companies receiving just over $5 million, while man-led companies received a little less than $12 million.

The funding gap closely mirrors the diversity in venture capital, which is dominated by white, male Ivy-league grads. In the tech startup world where capital is used to fuel the hyper growth necessary to disrupt the establishment, venture capitalists play the kingmakers. It is a vicious circle where venture capitalists invest in similar founders, who (when successful) create tremendous wealth for the investors and themselves. Those founders then become the investors and the cycle continues.

Narrow investment profile has wide-ranging impact.

The lack of access to funding is a major disadvantage for minority founders, but the detriment is not just to the entrepreneurs. We are all impacted by which companies receive funding. Tech investors have an outsize influence on what our future looks like - the products and services we use, preferred areas of innovation, and the communities that get to benefit from it.

How do we get more ideas off the ground that can solve problems for all of the different communities in our country and the world? How can we level the playing field to drive more inclusive innovation? How can we create an equitable fundraising landscape, where the economic gains from our country’s leading growth sector can be earned on merit?

Equity crowdfunding presents new opportunity to level the playing field.

Although there are recorded examples of crowdfunding dating back to the 1700s, the first instance of modern crowdfunding was over 20 years ago when a British rock band raised online donations to fund a reunion tour. Over a decade later, in 2008 and 2009 respectively, Indiegogo and Kickstarter were founded, with revenues topping $1 billion just a few years later. These perk-based platforms solidified crowdfunding as a legitimate and major source of funding for ideas and emerging businesses.

In 2016, the U.S. Securities and Exchange Commission started allowing non-accredited investors to invest in startups for equity. For the first time, this opened the door for a majority of the U.S. population to invest in startup companies. Founders were no longer limited to the traditional sources for financing and the groundwork had been laid to democratize investing and fundraising.

Republic is changing the funding landscape for entrepreneurs.

That same year, an equity crowdfunding platform, Republic, was created with a goal to democratize startup investing. The New York company entered the scene with a focus on leveling-out the fundraising landscape for both founders and investors. The strong focus on currently underserved founding teams -- those with women, minorities, immigrant, and veteran founders -- sets Republic apart. The founders built Republic on the foundational, research-supported construct that good ideas can come from anywhere and that ideas and innovation should be driven by a meritocracy.

Republic recently released a report to detail the progress made toward their goal of leveling the playing field by providing a better avenue to funding for diverse founders and investors. The report, titled “The business of diversity” contains several affirmative findings. In short, their model is working. Twenty-five percent of investments on Republic are going to companies with underrepresented founders of color (defined as Black and Latino/Hispanic in the report) and 44% are going to companies with a female founder, versus 1% and 13% respectively, for investments by VCs.

Female founders are receiving a larger percentage of investment dollars on Republic.

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Caroline Hofmann, the COO of Republic, says that the system is fundamentally unfair for the fantastic entrepreneurs on their platform who deserve to be successful but might not have the connections to Silicon Valley investors that a Stanford graduate does.

“The numbers that we have are really different because when you have a different investment vehicle that is available to the crowd, the types of startups and founders that you can help successfully raise look quite different.”

Forty-six companies have successfully raised capital on Republic, across many industries and stages of growth. Some, like MadeBOS, were seeking money to help launch an initial product. At the other end of the spectrum, Roomi was raising a Series A financing, and used Republic to engage their user base and market to potential new users.

Republic’s next steps and future impact of equity crowdfunding

Current regulations cap crowdfunding at $1 million, which, for fast-growing tech companies is rarely the only source of funding. Hofmann anticipates that the caps will increase over the coming years.

“If the caps go up to $5 Million, people could look at this as their sole or primary source of funding and move from institutional fundraising to the crowd.”

While Hofmann is excited by all of the growth and success of the platform in these two years, she says that the Republic team is still laser-focused on the goal to democratize the funding process. Since equity crowdfunding opens investment opportunities to such a large population, it has the potential to unlock billions of dollars every year. The impact of that capital coming from a large and more diverse audience could create the change they are seeking -- a leveling of the playing field.

“I truly think that if everyone invests small amounts in startups that they are truly excited about, we would have a very different tech ecosystem.”